IFRS17

IFRS 17 international financial reporting standard

With the publication of the IFRS 17 standard in May 2017, the insurance industry faced a challenge. In 2021, each financial statement must comply with the new standard. Insurers must complete the implementation process well before that date. The transition to IFRS 17 is complicated, but still attainable. A step-by-step approach is preferable. Ultimately, successful implementation will also bring tangible benefits to insurers.

IFRS 17 (International Financial Reporting Standard) replaces IFRS 4, which has been in force for insurance providers since 2004. The purpose of the standard is to further unify the valuation policy and to increase transparency for regulators and stakeholders.

New valuation standard

The core of the new standard is the obligation to calculate the present value of insurance contracts. IFRS 17 provides a measurement model for this, the core of the new valuation system. The model works according to the building block approach. The premium allocation approach is a simpler model and may be used for a number of insurance products. The variable fee approach was created for specific profit-sharing contracts.

Cash flow as a measure of profitability

IFRS 17 definitively settles with existing valuation principles. Within the above-mentioned building block methodology, the so-called fulfilment cash flows are central. These are the probability weighted average cash flows required to meet the obligations associated with insurance contracts from the perspective of the insurer. These components (the blocks) form a subdivision:

The estimate you, as an insurer, make of all future incoming and outgoing cash flows in connection with insurance contracts (future cash flows);

Discounting the cash flows in order to express the time value (discounting);

A supplement for non-financial risks that may affect the relevant cash flows (risk adjustment).

These blocks may well be familiar to you. They are also guiding principles within Solvency II, albeit in a slightly different form. In IFRS 17, you’ll find a completely new concept that expresses the positive difference between the present value of incoming and outgoing cash flows. It’s called: contractual service margin.

New valuation models, new systems

These are, in brief, the most important concepts your organisation will encounter during the transition to IFRS 17. It is not yet possible to predict exactly what impact the application of the new standard will have on your organisation. It is however clear that the transition to IFRS 17 will start with an assessment of existing valuation models and of the capacity of your current systems. Changes to those models and systems will be required in order to retrieve and process historical data, among other things. Major changes to the reporting system for the profit-and-loss account can also be expected. The infrastructure of the existing policy administration systems will need to be improved and innovations will be necessary in IT and Data Analytics.

Organisational impact

IFRS 17 not only affects your systems and processes but also your organisational culture, business operations, and communication standards. In the preparatory phase, a great deal of emphasis is placed on knowledge transfer and additional training. Interaction within multidisciplinary project teams of actuaries, financials and IT specialists is essential for the implementation phase. One factor that complicates implementation and execution even more is that you cannot avoid running synchronously with the implementation of IFRS 9.

Practical tips for implementation process

To be ‘IFRS17 compliant’ on time, first an impact analysis is needed, and current systems will also have to be reviewed and, where necessary, adapted. It is also important to clean (historical) data up and make it accessible. Practical tips for an efficient implementation process include:

Choose a multidisciplinary approach and set up a task force to plan and achieve objectives for each discipline;

Use all available knowledge to test current and historical data for usability and quality;

Make use of expertise in the field of data analytics or contract this expertise in;

Choose a step-by-step approach with sufficient evaluation moments and ensure there is support;

Start in time to avoid overburdening your organisation;

Pay sufficient attention to the (additional) training of your employees.

Tangible benefits

IFRS 17 is primarily intended for greater transparency and to enable insurers in the European context to make more unequivocal assessments. At the same time, IFRS 17 also benefits insurers themselves. The transition provides for the construction of flexible systems and models that will provide a constant flow of relevant information. This offers new opportunities for product development and assessment using advanced data analysis techniques. Data collection and analysis will also accelerate the creation of more personalised insurance packages that are better tailored to client needs and specific risk profiles.

Inventory and advice

Every new standard involves work, and this definitely applies to the transition to IFRS 17. A successful implementation starts with an expert inventory, followed by concrete advice and a step-by-step plan. The Triple A specialists are ready to map out the most efficient route together with you.

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